TDS on Dividends in India – Post Budget 2020

With the advent of Financial Year 2020-21, dividend taxation in India has completely gone upside-down. The new provisions have again asked the recipient of Dividend to pay taxes instead of the Company who was distributing the dividends.

The changes in the Income-tax law which brought the above change are as under:

  • Dividend Distribution Tax (DDT) has been scrapped.
  • Dividend has been put to tax in the hands of shareholders.
  • Exemption limit of upto Rs. 10 lacs dividend has been removed.
  • Surcharge on dividends has been capped at 15%.
  • Interest expense against dividend income has been capped at 20% of dividend income.
  • Dividend received on or after 1st April 2020 on which DDT has already been paid is not liable to tax again.

Another major change in addition to the above is re-introduction of Tax Deducted at Source (TDS) or Withholding tax (WHT) on Dividends.

With the close of FY 2019-20, companies are in the process of distributing dividends. However, they are struggling with the above changes as the rate of TDS varies from shareholder to shareholder depending on several factors like residential status, type of shareholder, quantum of dividend, etc. In this regard, a summary of the rates of TDS (as provided under the Income-tax provisions)along-with the various conditions to be satisfied are summarized in the below table:

Residential status Type of shareholder Other conditions Base rate (%) Surcharge (%) HEC (%) Effective rate of TDS (%)
Resident Government/ RBI/ Corporation under central Act/ Mutual Fund Copy of PAN along-with declaration that it holds beneficial interest in shares owned by it        –        –        –        –
LIC/ GIC/ any other insurer Copy of PAN along-with declaration that it holds beneficial interest in shares owned by it        –        –        –        –
Any other Less than 5,000        –        –        –        –
More than 5,000 Form 15G/H        –        –        –        –
PAN 7.5        –        – 7.500
No PAN 20        –        – 20.000
Non-Resident Any Dividends in respect of bonds or Global Depository Receipts (GDRs)2 10 * 4 10.400
FIIs/ FPIs        – 20 * 4 20.800
Company upto 1 cr 20        – 4 20.800
1 cr – 10 cr 20 2 4 21.216
exceeds 10 cr 20 5 4 21.840
Other than the above (including NRIs and others) upto 50 lacs 20 4 20.800
50 lacs – 1 cr 20 10 4 22.880
exceeds 1 cr 20 15 4 23.920

*The rates of surcharge are applicable on all the non-residents (depending on their income) irrespective of the type of assessee. Accordingly, rate of surcharge for FIIs/ FPIs and dividends in respect of GDRs will be dependent on the type of shareholder i.e. company or non-company.

Basis the above one may note that the rates of TDS will be varying from 0% to 23.92%.

However, the above-mentioned rates are based on the provisions of the Income tax Act only i.e. before considering any benefit available under the Double Taxation Avoidance Agreement (DTAA or tax treaty)of the country of residence of the shareholder. Where the shareholder is entitled and is willing to claim tax treaty benefits, it will be required to submit the following documents with the company, before it distributes the dividend:

  • Tax Residency Certificate (TRC) issued by tax authorities of country of residence
  • Form 10F duly executed in the prescribed format
  • No PE declaration
  • PAN card copy

After obtaining and validating the above documents, the companies need to analyze the provisions of the India’s DTAA with the country of residence of the shareholder along-with the recently introduced provisions of Multi-lateral Instrument (MLI) to conclude the final rate of TDS. However, even after the above TDS, the non-resident shareholder will not be spared. In case TDS is computed in accordance with the DTAA provisions, the non-resident shareholder will also be required to file its income tax return in India as per the provisions of the Indian Income-tax Act.

Considering the above, it appears that companies with huge non-resident shareholder base will be subjected to excessive turmoil while distributing dividends. Accordingly, it is high time that the Government of India wakes up and provide at least some relief to ease out this huge compliance burden from the shoulders of the Indian companies which are already stuck in the current scenario of Covid-19.

Disclaimer: This content is meant for information only and should not be considered as an advice or opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

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